Always Ask a Banker to Put the Lie in Writing

July 13 (Bloomberg) -- If we take Bob Diamond and Paul
Tucker at their word, part of the Libor scandal at Barclays Plc
can be chalked up to a series of comic misunderstandings, like a
children’s game of telephone. It’s a bit much to swallow, but
the spectacle sure has been fun to watch.

Both men agree that on Oct. 29, 2008, while the financial
system was on the brink, Tucker, who is the Bank of England’s
deputy governor, called Diamond on the phone. Diamond, who
resigned last week as Barclays’s chief executive officer, was
head of the company’s investment-banking business at the time.

In Diamond’s version, Tucker told him “he had received
calls from a number of senior” U.K. government officials asking
“why Barclays was always toward the top end of the Libor
pricing,” according to a file note Diamond wrote that day.
Tucker said “while he was certain we did not need advice, that
it did not always need to be the case that we appeared as high
as we have recently,” according to Diamond’s memo.

Tucker, testifying before a U.K. parliamentary panel this
week, said that last sentence of Diamond’s note “gives the
wrong impression.” He wasn’t nudging Barclays to underreport
its Libor submissions, he said.

Rather, Tucker said he was expressing concern that Barclays
was paying too much to borrow money -- and sending signals to
the markets that it was desperate for funding, at a time when
Barclays was widely viewed as the next big U.K. bank to need a
government bailout. Tucker said he didn’t make any record of the
talk, in spite of the Bank of England’s policy to make notes of
important phone calls. He said he was too busy.

Infamous Rate

Libor, or the London interbank offered rate, is the now-infamous interest-rate benchmark used in hundreds of trillions
of dollars of transactions globally, from loans to derivative
contracts. Each day, in surveys overseen by the British Bankers’
Association, major banks estimate their borrowing costs. It has
been an open secret for years that banks routinely misstated
their numbers. A Barclays Capital strategist, Tim Bond, even
said so in a May 2008 interview.

Last month, Barclays agreed to pay $453 million to settle
U.S. and U.K. claims that it manipulated its Libor submissions
as far back as 2005 -- years before the phone call in question.
Sometimes the bank low-balled its costs to make itself look
healthier. Other times, it filed false rates to make trading
positions more profitable. On some occasions, its traders
colluded with other banks, Barclays admitted.

Diamond told the same parliamentary panel last week that he
didn’t interpret Tucker’s comments as an instruction to lower
Barclays’s Libor submissions. Another top executive did perceive
them that way, however, after receiving Diamond’s memo and
passed down orders to that effect to the bank’s submitters. That
person, Jerry del Missier, resigned as Barclays’s chief
operating officer July 3.

The supposed misunderstandings don’t end there. In his
October 2008 file note, Diamond wrote that he asked Tucker “if
he could relay the reality, that not all banks were providing
quotes at the levels that represented real transactions.”

Tucker told members of Parliament’s Treasury Committee that
he didn’t take that statement to mean there was cheating going
on. He said he thought it meant that “when they come to do real
transactions, they will find they are paying a higher rate than
they are judging they would need to pay.”

Tucker also was asked about a 2007 meeting with banking-industry members of a Bank of England liaison group. Minutes
show “several group members thought that Libor fixings had been
lower than actual traded interbank rates.” Tucker, who chaired
the meeting, said “it did not set alarm bells ringing.”

Not Dishonest

“This doesn’t look good, Mr. Tucker,” the committee’s
chairman, Andrew Tyrie, said. “It doesn’t look good that we
have in the minutes on the 15th of November 2007, what appears
to any reasonable person to be a clear indication of low-balling, about which nothing was done.” Tucker replied: “We
thought it was a malfunctioning market, not a dishonest
market.”

Diamond’s credibility doesn’t look any better. This week,
Barclays’s departing chairman, Marcus Agius, released an April
10 letter from the chairman of the U.K.’s Financial Services
Authority, Adair Turner, expressing doubts that Barclays could
be trusted. At last week’s hearing, Diamond said the FSA had
been happy with the bank’s “tone at the top.” He downplayed
the FSA’s concerns as mere “cultural issues,” even when asked
about the letter, which hadn’t been released publicly yet when
he testified. It’s hard to know whom to believe less.

There’s no mystery why Tucker’s 2008 phone call to Diamond
is receiving so much attention. The notion that a central banker
may have prodded a big bank to lie about its numbers rings true.
Many times over the past five years, in Europe and the U.S.,
bank regulators and other government officials have seemed to be
in cahoots with the industry they oversee.

In May 2008, for example, the U.S. Office of Thrift
Supervision let IndyMac Bancorp Inc. backdate a capital
contribution so it would appear on its books in the prior
quarter. IndyMac failed two months later, costing the Federal
Deposit Insurance Corp. almost $11 billion. When banks were
teetering in 2008 and 2009, regulators and lawmakers in Europe
and the U.S. browbeat accounting-standard setters into making
emergency rule tweaks so banks could show smaller losses.

After American International Group Inc.’s 2008 government
bailout, officials at the Federal Reserve Bank of New York
pressured AIG executives not to disclose details of how the
company had paid its counterparties 100 cents on the dollar
using taxpayer money. Now it turns out the New York Fed says it
received “occasional anecdotal reports from Barclays of
problems with Libor” in 2007, according to a statement it
released July 10. The district bank wasn’t a party to Barclays’s
settlement.

Here’s one lesson that hopefully has been learned from all
this: If you ever think someone in business is telling you to
lie, ask that person to put it in writing.

(Jonathan Weil is a Bloomberg View columnist. The opinions
expressed are his own.)

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